Zakat

English: religious tax
Alternate spelling: Zakah

Definition: An obligatory contribution which every wealthy Muslim is required to pay to the Islamic state, or to distribute amongst the poor.

According to Islam, zakat – the third pillar of Islam – purifies wealth and souls. Zakat is levied on cash, cattle, agricultural produce, minerals, capital invested in industry and business.

There are two types of zakat:
Zakat al Fitr, which is payable by every Muslim able to pay at the end of Ramadan. This is also called Zakat al Nafs (poll tax).
Zakat al Maal is an annual levy on the wealth of a Muslim above a certain level. The rate paid differs according to the type of property owned.

IFN weekly market roundup: 14th – 20th January 2017

The week has seen a flurry of activities in the Islamic finance world with sovereign Sukuk finding solid grounds and their corporate counterparts promising potential for 2017. The industry is taking regulations seriously with new and revamped legislation underway. Institutions and firms are announcing their fiscal results for 2016, with an analysis of last year and expectations for the new year. Europe brings in good news in the fintech sector as Fitch announces Takaful prospects for two Southeast Asian Islamic powerhouses.

SOVEREIGN SUKUK
From Asia, the government of Indonesia auctioned sovereign Sukuk (SPN-S 11072017 and four project-based Sukuk series), with an indicative target of IDR6 trillion (US$449.4 million) on the 24th January. Brunei issued its 141st series of short-term Sukuk Ijarah for BN$100 million (US$69.77 million). Maturing on the 13th April 2017, the 91-day facility was priced at 0.63%.

Qatar’s central bank sold QAR8 billion (US$2.2 billion)-worth of Sukuk on the 16th January. The  while the Central Bank of Bahrain’s monthly Sukuk Salam Islamic securities has been 100% fully subscribed. 
In Africa, Egypt made headlines this week. The country could be issuing a US dollar Sukuk facility in 2017, after the investor meetings for its conventional bond that are scheduled to end on the 23rd January.

NON-SOVEREIGN SUKUK
The week saw potential Sukuk announcements for 2017 with Bahrain’s Nogaholding engaging banks for either an Islamic or conventional facility, reported Reuters; and Saudi’s Jabal Omar looking into the Sukuk market this year, according to its CEO, Yasser Al Sharif in an interview with Bloomberg. 

From Southeast Asia, Fitch Ratings said that Malaysian firms continue to be the most active corporate Sukuk issuers. Fitch expects Sukuk issuance to maintain growth momentum in 2017 and in turn bring in more Sukuk alongside conventional bonds to the market. Sunway Treasury Sukuk of Malaysia has issued RM100 million (US$22.43 million)-worth of Islamic commercial papers on the 19th January 2017. 

The Investment Corporation of Dubai is preparing to launch its US$700 million US dollar Sukuk by next week, after a five-day roadshow in Asia, the Middle East and Europe, according to GlobalCapital. 

In Bahrain, the bourse has listed a six-month Sukuk Ijarah facility worth BHD26 million (US$68.47 million) and three other treasury bills, amounting to BHD201 million (US$529.34 million), according to a statement. 

REGULATIONS
The Chartered Institute of Islamic Finance Professionals issued the CIIF Code of Ethics and CIIF Standards of Professional Conduct which set out principles on par with other codes of ethics by its peers, both foreign and local.

Over in the Middle East, the government of Azerbaijan signed a grant agreement with the IDB for the provision of technical assistance in drafting an Islamic financing legislative base, according to Trend. Iran’s Banking Reform Bill, a law outlining reforms in the country’s banking sector, will reportedly be finalized in the parliament’s spring session.

BANKING & FINANCE
The National Transmission and Despatch Company of Pakistan secured Islamic and conventional financing facilities worth PKR18 billion (US$171.43 million) to finance the installation of a 250 km 500 kV transmission line from Thar Desert to Matiari district, according to The News. The country’s quarterly housing finance review by the central bank also reported that Islamic banks led in terms of home financings compared to conventional banks in the third quarter of 2016. The total amount of financings by Islamic banks was PKR25.8 billion (US$245.94 million) during the period.

Abu Dhabi Islamic Bank has introduced its first Islamic equity investment structured note of 2017 to aid investors’ exposure to undervalued blue chip companies from a range of sectors. 

The International Center for Education in Islamic Finance has signed an MoU with the International Federation of Red Cross and Red Crescent Societies to research financial instruments to increase humanitarian initiatives, including the development of Sukuk social impact bonds, Waqf and Zakat endowment funds among others. 

NEW ENTITIES
Herbert Smith Freehills announced that it has received a Qualified Foreign Law Firm license from Bar Council Malaysia. Its new Malaysian office will open in May 2017.

ASSET MANAGEMENT
In Malaysia, the takeup of the Employees Provident Fund’s Simpanan Shariah reached RM59.03 billion (US$13.22 billion) of the initial RM100 billion (US$22.43 billion). The fund also allocated RM50 billion (US$11.22 billion) as further injection for Simpanan Shariah 2018.

Securities & Investment Company entered into a strategic partnership with Trucial Investment Partners for the Shariah compliant SICO Trucial US Real Estate Income Fund estimated to be worth US$50 million, possibly launching in the second quarter of 2017. 

FINTECH
EETHIQ Advisors from Luxembourg and the French asset manager 570 AM are partnering on two fintech initiatives, EETHIQ founder and managing director Rachid Ouaich told IFN. The first project is to increase 570 AM’s Shariah compliant digital mortgage offering to European countries other than France; while the second is to create a personal finance management platform with the capability to link to banking accounts that would incorporate Shariah compliant financial products and automated Zakat calculations.

TAKAFUL
Fitch Ratings opined that Takaful products demand is low in Indonesia caused by a lack of awareness and a robust Islamic finance system. As for Malaysia, the country’s Takaful industry continues to achieve higher growth than the conventional sector, contributed by a firm presence and consumer awareness.

Agrobank, a Shariah compliant institution, established Agro Nurani, the country’s first Takaful coverage for persons with disabilities. The scheme offers benefits including cash allowance for disabilities caused by accidents. 

MOVES 
Norashikin Mohd Kassim has left CIMB-Principal Islamic Asset Management (CIMB-Principal IAM) to join an Islamic bank; Chief Investment Officer Mohd Fadzil Mohamed has stepped up as acting CEO.

Dubai International Financial Center Authority welcomed its new CFO, Yazan Mohamad Nasser. Yazan was previously the CFO for Emaar Malls with 30 years of experience in finance and audit. 

Aljazira Takaful Taawuni Company

SAUDI ARABIA: Aljazira Takaful Taawuni Company achieved a 46.76% growth in net profit before Zakat to reach SAR25.92 million (US$6.91 million) in 2016 from SAR17.66 million (US$4.71 million) it posted in the previous year, while its net profit before Zakat for the fourth quarter of 2016 also rose 42.55% year-on-year to reach SAR7.53 million (US$2.01 million) from SAR5.29 million (US$1.41 million) in the corresponding quarter of 2015, according to a bourse filing.

 

 

Fintech for Islamic finance in the works

GLOBAL: Luxembourg-based EETHIQ Advisors and French asset manager 570 AM are collaborating on two fintech initiatives, EETHIQ founder and managing director Rachid Ouaich told IFN. The first project is expanding 570 AM’s Shariah compliant digital mortgage offering to other European countries beyond France; the firms are currently working with a few European banks to do so.

The second is developing a personal finance management platform, which is currently still at the research and development stage. The app, which will have the capability to link to banking accounts, will incorporate Shariah compliant financial products and automated Zakat calculations.

INCEIF inks deal with IFRC

MALAYSIA: The International Center for Education in Islamic Finance (INCEIF) has signed an MoU with the International Federation of Red Cross and Red Crescent Societies (IFRC) to venture into Islamic social finance opportunities. According to a joint press release, INCEIF will research feasible financial instruments to aid humanitarian initiatives, including the design and development of Sukuk social impact bonds, Waqf and Zakat endowment funds among others. Pilot projects are expected to be launched in selected countries in Africa, the Middle East and Asia, including Malaysia.

 

Calling for greater synergy and better collaboration of the Islamic finance industry in Malaysia

Recently, Bank Negara Malaysia (BNM) shared their expectations of the Islamic finance industry for 2017. Themed ‘Toward greater synergy through better collaboration’, BNM wants the industry to focus on three key areas.

In the first area under ‘Wider intermediation roles of Islamic finance institutions’, the focus is on both investment and value-based intermediation. On the latter, the industry is expected to strengthen its role in social finance through the integration of Zakat/Waqf and Sadaqah as part of the financial inclusion agenda.

The second key area is in relation to the effective implementation and enforceability of developmental and regulatory policies. As such, the most important aspects for the Takaful industry are the upcoming splitting of licenses for composite Takaful operators and the robust internal set-up to meet new regulatory requirements (eg Shariah standards). BNM is also expecting Islamic subsidiaries to put in place more effective operating models that will utilize group structures and common resources.

The third key area is on the innovation of product offerings and delivery channels. BNM is expecting the Takaful industry to come up with new, more affordable protection products for the underserved segment. The regulator also wants the industry to embrace digitization and use new technologies such as blockchain to accelerate risk-sharing transactions and provide trade credit protection for SMEs. Finally, it wants the industry to apply the various Shariah contracts more dynamically to diversify their product offerings.

It is laudable for BNM to want the industry to progress further. At the same time, many of these initiatives are resource-intensive. In the short run, they may not bring much commercial success. Henceforth, as the theme suggested, the industry should cooperate rather than compete with each other on some of these initiatives.

A good example is the insurance/Takaful starter pack which the Life Insurance Association of Malaysia and the Malaysian Takaful Association are currently developing together. The aim is to introduce the concept of life insurance/Family Takaful to the public at an affordable premium/contribution rate so as to ultimately increase the penetration rate and financial inclusion of the population in Malaysia.

It will be interesting to see if the industry will successfully collaborate on other initiatives as well.

Marcel Omar Papp is the head of ReTakaful Asia at Swiss Re. He can be contacted at Marcel_Papp@swissre.com.

Maqasid Shariah — the ethos of sustainable and responsible investing

Awareness on sustainable and responsible investing (SRI) – an investment management approach that incorporates environmental, social and governance criteria in traditional financial analysis – has been steadily increasing through the last decade. According to Principles for Responsible Investment (PRI) figures, assets under management which follow its code of responsible investment had surged to over US$62 trillion in April 2016 from just US$6.5 trillion a decade ago. Since the launch of PRI in April 2006, the number of signatories has grown from 100 to more than 1,500 as at the end of April 2016.

Interestingly, Islamic finance has also been developing in tandem with the growth of SRI. However, many SRI investors are still unaware that Islamic finance shares common philosophies with SRI. The underlying pillars that govern the operation of Islamic finance are based on achieving Maqasid Shariah, which ultimately seeks to protect the interests of the public. It is on this basis that Islamic finance and SRI both contribute to improving living conditions and the promotion of equality and ethics. 

The preservation of wealth and the sustainability of social welfare are among the main objectives of Islamic finance. Resources are reallocated (eg collection and circulation of Zakat) from the surplus sector to the deficit sector, which encompasses the process of creation, consumption and distribution. This value chain is envisaged to facilitate the efficient circulation and distribution of wealth; the ultimate goal is to realize human welfare and preserve public interests. As such, Islamic finance is based on a socioeconomic paradigm driven by a code of ethics. The ability to enhance this relationship will bridge SRI and conventional markets for the benefit of Islamic finance and its appeal as a sustainable form of alternative financing that is available to all.

Nevertheless, the Islamic finance industry faces several challenges that need to be overcome in order to unlock its vast potential and compete in the mainstream financial market. The main challenges are the development of a harmonized Shariah framework, legislative changes and the perception that Islamic finance is only for Muslims. In non-traditional markets, Islamic practitioners need to work harder than their conventional counterparts to educate investors due to a lack of public awareness on Islamic finance products and services.

Greater integration between Islamic finance and SRI should be explored and examined, so that their principal values can be matched to increase the potential for Islamic finance and tap the sizeable pool of global SRI funds. Moving forward, key stakeholders at both ends – encompassing regulators, credit rating agencies, market practitioners, financial experts and research centers – should seek ways of building up the connectivity of these markets. 

Ruslena Ramli is the head of Islamic finance at RAM Ratings. She can be contacted at ruslena@ram.com.my.

The creation of a Zakat fund in Tunisia — a refreshed proposal

The Tunisian Association of Zakat (ATZ) has announced, during its assembly meeting held on the 21st December 2016, the submission of a proposal related to the establishment of a Tunisian Islamic Zakat fund to the president of the country for consideration and adoption in order to be legalized.

Initial proposal unachieved
It is useful to note that, in the context of developing an Islamic finance legal framework in Tunisia, the Islamic Finance National Committee (the Committee), which achieved its work on the 29th September 2012, included a Zakat subcommittee meant to prepare a draft decree related to a Zakat fund.

On the conclusion of the Committee’s work, the main reasons expressed behind the creation of such a fund included, in addition to the general governmental orientation of developing Islamic finance in Tunisia, the collection and disbursement of Zakat funds in a centralized, organized Shariah compliant national body adapted to Tunisian specificities and subject to rigorous financial monitoring.

Important role of civil society 
It is also essential to highlight the reasons behind the creation of ATZ in 2011 as a scientific reference for Zakat and as a means of awareness about its potential. For that reason, its role, if gathered with other civil organizations, is important in convincing the government and society of the feasibility of the Zakat fund as an independent body which promotes the principle of harmony between the civil state and the state religion which is Islam while securing a legal neutrality toward religious practice and also as an effective structure in support of the economic and social development creating jobs through micro projects.

A missed opportunity to reconsider
The president of ATZ asserts that: “Tunisia is losing now one of the significant solutions to overcome a difficult economic and social period because of the legislative and institutional vacuum caused by the absence of a national Zakat fund in Tunisia similar to those in many Muslim countries.”

In conclusion, I think it is a good time to take the necessary legal measures related to Zakat in accordance to the Tunisian civil law and it is always important where this instrument is concerned that the authorities contribute in setting up a Zakat fund, in harmony with state institutions, which can provide the necessary money to alleviate poverty. 

Any public opinion or media appearance is the author’s independent personal opinion and should not be construed to represent any institution with whom the author is affiliated.

Mohamed Araar is the deputy director of the external private financing and international relations at the General Directorate of External Financing and Settlements at the Central Bank of Tunisia. He can be contacted at med.araar@yahoo.fr.

Islamic Banking and Finance in Indonesia: A Critical Analysis

The book ‘Islamic Banking and Finance in Indonesia: A Critical Analysis’ has four main sections that starts with providing the Indonesian economic landscape, followed by a considerably long account of various issues and concerns on Islamic banking and finance and its management and concludes with the serious issue of human capital development. The author discusses some issues related to Islamic banking and finance, for instance, legislation in Indonesian Islamic financial institutions, the Islamic banking industry, Zakat, Sukuk and others. Such an overview and analysis are presented in a very simple, educational and easy to understand approach. This book provides a wider perspective to readers about Islamic banking and financial institutions in Indonesia. The book also provides a unique learning experience based on real-life situations rather than pure academic presentation.

It’s an eye-opener. This book promotes Islamic banking enthusiastically and yet pinpoints precisely a number of unresolved things in practice. It shows exactly the gap between the original idea and its implementation. Moreover, this book also offers a road map to narrowing that gap. The book is able to meet the needs of the stakeholders of Indonesian Islamic banking, covering the historical background, foundation, contracts as well as the next challenges and the opportunities. It is an intellectually rich book that develops an important analysis of Indonesian Islamic banking as an inclusive economic institution fostering economic growth as well as promoting prosperity to the benefit of the public aligned with the objective of Shariah.

One of the key statements in the book is the following: “Islamic finance should move from Shariah compliant products to Shariah-based products. Shariah compliant products were based on mirroring [the] concept to conventional products with the elimination of prohibited items. The compliance criteria were based on Aqad assessment. Shariah-based products should be based on both Aqad assessment and the objectives of Shariah (Maqasid Shariah) assessment.” This statement sends a very strong message on the way forward for the development, value proposition and innovation within the Islamic finance Industry, and not just within Indonesia, but all over the world.

This book is a must-read for bankers, entrepreneurs, academicians and the public in general. This book gives an insight to bankers on how to formulate an effective strategy in boosting the performance of Islamic banking in Indonesia, covering people strategy, product and service strategy as well as the operational strategy. Entrepreneurs will get benefits through understanding the unique features of Islamic banking products related to their business. This book is important to banking and finance practitioners who are seeking innovative ways to improve their services and add more value to them. Researchers and academicians who need to understand the issues of each domain and the general public to be informed of what is best for them will benefit from this book as well. Government and policymakers will get some insights from this book as it provides a mechanism to address complex problems. Drawn upon the experience of Indonesia, the book will benefit not only readers who are Muslims but also those who are non-Muslims, in Indonesia and other countries.

ISBN 978-6020-17851-8-8
Publisher: Pustaka Nusantara, Indonesia
Author: Muhammad Shodiq 

The creation of a Zakat fund in Tunisia – a refreshed proposal

The Tunisian Association of Zakat (ATZ) has announced, during its assembly meeting held on the 21st December 2016, the submission of a proposal related to the establishment of a Tunisian Islamic Zakat fund to the president of the country for consideration and adoption in order to be legalized.

Initial proposal unachieved
It is useful to note that, in the context of developing an Islamic finance legal framework in Tunisia, the Islamic Finance National Committee (the Committee), which achieved its work on the 29th September 2012, included a Zakat subcommittee meant to prepare a draft decree related to a Zakat fund.

On the conclusion of the Committee’s work, the main reasons expressed behind the creation of such a fund included, in addition to the general governmental orientation of developing Islamic finance in Tunisia, the collection and disbursement of Zakat funds in a centralized, organized Shariah compliant national body adapted to Tunisian specificities and subject to rigorous financial monitoring.

Important role of civil society
It is also essential to highlight the reasons behind the creation of ATZ in 2011 as a scientific reference for Zakat and as a means of awareness about its potential. For that reason, its role, if gathered with other civil organizations, is important in convincing the government and society of the feasibility of the Zakat fund as an independent body which promotes the principle of harmony between the civil state and the state religion which is Islam while securing a legal neutrality toward religious practice and also as an effective structure in support of the economic and social development creating jobs through micro projects.

A missed opportunity to reconsider
The president of ATZ asserts that: “Tunisia is losing now one of the significant solutions to overcome a difficult economic and social period because of the legislative and institutional vacuum caused by the absence of a national Zakat fund in Tunisia similar to those in many Muslim countries.”

In conclusion, I think it is a good time to take the necessary legal measures related to Zakat in accordance to the Tunisian civil law and it is always important where this instrument is concerned that the authorities contribute in setting up a Zakat fund, in harmony with state institutions, which can provide the necessary money to alleviate poverty.

Any public opinion or media appearance is the author’s independent personal opinion and should not be construed to represent any institution with whom the author is affiliated.

Mohamed Araar is the deputy director of the external private financing and international relations at the General Directorate of External Financing and Settlements at the Central Bank of Tunisia. He can be contacted at med.araar@yahoo.fr.

 

Women and Words: More jobs for the boys in iCSR?

By Laura Elder, a cultural anthropologist who teaches in the Department of Global Studies at Saint Mary’s College in Notre Dame. Her primary research interests are global political economy, Islam and gender. She can be contacted at lauraeveelder@gmail.com.

Corporate social responsibility (CSR) is meant to support social development initiatives. Of course, depending on the tax regime, CSR may also be particularly important in relation to reducing tax liabilities. But, focusing on social development goals for Islamic finance, AAOIFI has designated five mandatory disclosure requirements for CSR including elucidating policies for screening and dealing with clients, statement of earnings and expenditure prohibited by Shariah, employee welfare and Zakat. But, according to the recently released 2016 Islamic Finance Development Indicator Report, most Islamic finance institutions are not disclosing this information on their CSR initiatives.

CSR programs and initiatives also reveal interesting intersecting assumptions about women’s empowerment, expertise and social function. For example, Shariah advisors have repeatedly told me that female Shariah advisors are more often designated by their male colleagues as lead screeners and decision-makers for CSR funds. As reported by these women, they were assigned CSR roles in particular because their male colleagues assumed that they had more expertise in social development because of their ‘mothering’ expertise. At the other end of the spectrum, among receivers of CSR rather than among financiers, banking and finance institutions have become similarly interested in harvesting women’s social expertise in microfinance guarantee programs. Many analysts have labeled microfinance initiatives predatory because there is often an explicit transference of risk and responsibility onto women and women’s networks. For example, banks often outsource loan repayments to women’s groups as women’s consistency in paying back and managing the group’s finances reduces administration costs for financial institutions. In this way, women’s social expertise and networking are taken for granted and remain unrewarded.

In both of these cases, both iCSR and microfinance, the fundamental issue is that without adequate disclosure of a financial institution’s methodologies for screening, dealing and payments, it will never be possible to evaluate social development initiatives. Certainly, this is not a problem peculiar to Islamic financial institutions; however, I suggest that CSR disclosure is a particularly potent place to begin working toward transparency. Otherwise, both giving and receiving iCSR may result only in more unrewarding work for women. 

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